What happened
Shares of Estée Lauder (EL -0.04%) were moving lower last month as a weak second-quarter earnings report and a cut in full-year guidance gave way to a steady decline in the stock over the duration of the month as fears of global recession mounted.
According to data from S&P Global Market Intelligence, the stock lost 12% during the month. As you can see from the chart below, the stock fell early in February on the earnings report and continued to decline over the duration of the month.
So what
Estée Lauder was a big winner in the early stages of the pandemic, benefiting from strong demand for its skin care products in China, but the fiscal second-quarter earnings report shows it's struggling to maintain that momentum, especially in the face of COVID lockdowns in China and difficult comparisons to the year-ago quarter.
Revenue in the quarter fell 17% to $4.62 billion, with organic sales declining 11% due to currency headwinds. That result was still ahead of analyst estimates at $1.30.
Revenue from its skin care segment, the cosmetics giant's biggest category, fell 20% to $2.38 billion, and makeup sales were down 9% to $1.27 billion.
Citing COVID restrictions in China, the company also reported a 17% decline in reported revenue in Asia/Pacific, and Europe was weak as well, with revenue down 22% to $1.81 billion in Europe, Middle East & Africa.
Further down the income statement, gross margin fell 430 basis points to 73.6%, due in part to elevated inventory levels at retail partners and the decline in revenue. As a result, adjusted earnings per share (EPS) declined from $3.01 to $1.54, but that beat estimates at $1.30. The stock fell 5% on the report.
Over the rest of the month, the stock slipped, trending with stocks more broadly over concerns about a global recession and more price competition in the e-commerce channel in China.
Now what
What really seemed to sink the stock was Estée Lauder's guidance, as it said it was lowering its full-year guidance to account for challenges in its travel retail business.
For the current quarter, the company expects a sales decline of 12%-14%, and its adjusted EPS guidance of $0.37-$0.47 was also much worse than estimates at $1.77.
Its full-year EPS guidance of $4.87-$5.02 was also worse than the consensus at $5.35.
Given those hits to the bottom line, it's not surprising the stock is down. While Estée Lauder still has an enviable set of brands in cosmetics, it may take a few quarters for profitability to recover.
